Why is Bangladeshi Taka Losing its Value? : Devaluation and a Volatile Currency Market

The value of the Bangladeshi Taka (BDT) has fallen substantially in recent months, as the US dollar has secured the throne for the strongest currency amid the Russia-Ukraine crisis.

The Covid-19 pandemic has been a menace to the world, causing economic disruptions in most countries, including Bangladesh. The turbulent currency market has been one such distressing issue, which has now been aggravated by the ongoing Russia-Ukraine conflict.

Bangladesh’s exchange rate has been under pressure against the greenback since the fourth quarter of 2021, when imports surged following rising demand and rising prices worldwide as the pandemic situation improved.

Why Has the Dollar Strengthened   

By the end of 2021, economies worldwide had started to recover from the pandemic’s blow, only to take another significant hit from the Russian invasion of Ukraine in February 2022. The countries’ being the world’s major exporters of fuel, metal, and agricultural products, a war between them disrupted the global supply yet again. Supply chain disruptions in these sectors raised the prices of energy and essential commodities in countries all over the world. In March 2022, the US inflation rate hit 8.5%, the highest in the nation’s history since 1981. To combat this inflation, the country’s Federal Reserve raised its key interest rates. 

Generally, higher interest rates increase borrowing costs, and this, in turn, causes people cut down on consumption. The falling demand brings rising prices or inflation down. Also, higher interest rates encourage foreign investment, raising demand for the local currency – in this case – the dollar. US Federal Reserve’s decision to increase interest rates has increased the demand for dollars and thus raised its value. In other words, the dollar has appreciated, and currencies of other countries across the world have been depreciating against the US dollar.

First Big Depreciation of Taka in 13 years 

On January 9, 2022, the taka had fallen by 25% in the past 13 years against the dollar, reaching an all-time low of Tk 86.00. Meanwhile, the dollar was sold at over Tk 90.00 by commercial banks and in the kerb or open market (illegal platform for trading dollars). This was a big drop considering that, for a given working day, the central bank depreciates the local currency by around Tk 0.05 to Tk 0.10 per USD. But this time, the interbank exchange rate on the previous working day was Tk 85.80, meaning a drop of Tk 0.20. 

This devaluation was Bangladesh Bank’s approach to shore up exports and remittances, given the pressure on the local currency exerted by soaring imports and declining remittance inflow. Devaluation can increase exports by making a country’s products more competitive in the global market.

Taka Depreciating Further; a Volatile Currency Market

The dollar rate increased further to more than Tk 87 on 17 May 2022, surpassing Tk 91 at the beginning of June. Currently, as of mid-October 2022, the price of a dollar stands at 102.15 Bangladeshi Taka. 

Despite the fixed dollar rate, there was a difference of Tk 5-6 in the price of a dollar between the country’s central bank and commercial banks, owing to the shortage of dollars. Higher import prices, falling remittances, and a hefty payment to the Asian Clearing Union (ACU) at the beginning of this year resulted in a limited supply of dollars and a reduction in the forex reserves to below $38 billion, which was $46 billion last year.

The gap in dollar price between the central bank rate and the commercial banks meant that the initial gradual depreciation of the taka and the central bank-established exchange rate was becoming ineffective. This necessitated a sharper devaluation of taka amid the global inflationary pressures.

Following the series of devaluation of Bangladeshi Taka against the USD, the price of the dollar in the local kerb market escalated too, reaching a record high of Tk 119 per USD on August 10, 2022, the reason being a supply shortage of dollars. There have been allegations that some people have been hoarding dollars in anticipation that the price of the dollar will rise higher in the coming days. This proved Bangladesh Bank’s measures to control the volatility in the dollar price as inoperative. 

Adoption of a Floating Exchange Rate

In a floating exchange rate system, the price of a country’s currency in terms of other currencies is determined by the forex market using demand and supply. On the other hand, a fixed exchange rate is determined fully or primarily by the government. 

On September 13, a floating exchange rate was made effective against the dollar to save the shrinking foreign currency reserve, thanks to the inflated import bills for high-price and high-demand commodities. On the same day, the interbank exchange rate rose to Tk 106.15 (highest) and Tk 101.67 (lowest) from the previous day’s Tk 96. The value of taka dropped by 11.73%, giving rise to the greatest depreciation in the country’s history. The currency has declined by 25% against the US dollar over the past year. 

What is a Floating Exchange Rate?

Banks currently purchase dollars from foreign exchange houses as remittance at a maximum price of Tk 107.5 t, while purchasing dollars from exporters at a price of up to Tk 99.

Importers are now paying for dollars at the weighted average exchange rate, which is the average of the prices at which banks acquire dollars from exporters and remittances from foreign exchange firms, and an additional Tk 1.

Bangladesh Foreign Exchange Dealers’ Association (BAFEDA) is currently computing the interbank exchange rate on the basis of the purchasing and selling rates of the banks. Experts hope that the floating exchange rate will aid in the stabilization of the foreign currency market. However, BAFEDA and the Association of Bankers, Bangladesh (ABB) established multiple dollar rates for various areas, including exports, imports, and remittance gains. Multiple rates may increase volatility in the currency market.

Diminishing Forex Reserves

The primary reason behind the quick depletion of Bangladesh’s forex reserves is excessive import payments. As of October 12 of this year, forex reserves stand at $36.3 billion. Even a couple of weeks ago, on September 29, the forex reserve was $36.5 billion.

Bangladesh Bank has injected $4.15 billion so far this fiscal year to enable lenders to settle import bills. This has placed additional strain on the country’s rapidly decreasing foreign exchange reserves. 

What Do the High Dollar Prices Mean for Bangladesh

An article in Arabianpost explains the concerns that economists and experts in Bangladesh have regarding the recent depreciation of Bangladeshi Taka. What worries economists is that, despite the depreciation of the taka in the exchange rate as a result of a rapid increase in demand for the US dollar, the country’s export revenues didn’t improve as significantly as expected. The fact that local banks have been paying an additional Tk 5-8 for every US dollar increased their operational expenses at numerous levels.

Aside from the payment of import bills at the customer level, the growing demand for the US dollar was also spurred by the volatility in global commodity prices in the aftermath of the Ukraine crisis. Bangladesh is anticipating a significant spike in wheat prices, with 30-35% of its import imports flowing from Russia and Ukraine.

The waning forex reserves and shortage of US dollars have made importing oil more difficult for Bangladesh, as administrative delays in regular transactions sometimes last over a week. But banks are allowed to purchase US dollars at market rates in order to reduce procedural delays and meet export/import schedules as closely as possible. But even though purchasing the dollar at increased prices is helping to avoid the depletion of dollars, higher domestic inflation is the price that the country is paying for it.

Experts believe that the true scenario is far worse, considering the current purchasing power of the general public who are yet to fully recover from the pandemic’s adverse impact on their income. Even in domestic markets, the devaluation of the taka plays a role, with prices of daily essentials increasing sharply, hurting lower-income households and affecting the majority of the country’s population. 

The government has difficult challenges ahead. Management of the market and the modification of USD-BDT exchange rates has become an immediate challenge, while the long-term goal is to secure a sufficient and sustainable forex reserve. In light of the changes in the international market, Bangladesh may need a reform in its core economic policies.

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